The (Tab)ulation

Elected officials in both parties have made what I call “magical, mystery tax pledges” that are at odds with bipartisan approaches to serious deficit reduction:

Republicans: Don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP.

Democrats, including President Obama: Don’t raise tax burdens on households making under $250,000 a year.

Some Republicans may not realize how their promise works against not only bipartisan compromise but against their own policy goals. As explained in a recent opinion piece I wrote for Bloomberg Government (subscription-only access here):

“To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with ‘supply-side’ economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy…”

Reducing tax expenditures would actually reduce the government’s role in the economy, a central goal...

House Republicans have adopted a budget they say will make tough but necessary spending cuts to rein in our nation’s burgeoning budget deficits. President Obama says the Republican plan is too radical. He hit the road last week to sell his own deficit reduction plan, which he says is more balanced.

So, it’s “game on.”

But just what is the purpose of this game?

If the purpose is to gain advantage for the 2012 elections, then recent events make sense. If, however, the purpose is to build consensus around a fiscal sustainability plan, we’re off on the wrong track. Rather than seeking areas of common ground, which clearly exist, the President and Republican leaders seem more interested in sharpening their differences.

Consider two major issues: tax reform and health care.

In both instances there is the potential for compromise. Indeed, without compromise on health care and taxes, it is hard to see how a meaningful plan for fiscal sustainability can be enacted.

Two bipartisan groups that looked at these issues last year were each able to find consensus, at least around a broad approach.

On tax reform, the Bowles-Simpson and Domenici-Rivlin commissions both recommended that most tax expenditures – deductions, exclusions and credits – be eliminated or greatly scaled back in exchange...

Under Ryan’s budget, these programs would grow from 46 percent of primary spending in 2011 to 62 percent in 2021. This compares with an increase to 56 percent under the President’s budget.

The divergence becomes even more pronounced after that. By 2040, Social Security, Medicare and Medicaid account for 74 percent of non-interest spending under Ryan’s budget compared to 62 percent under the President’s budget.

At first, this result may come as a surprise because it is clear that Ryan’s budget would do far more than the President’s budget to curtail the growth of federal health care spending. At...

Moe, Larry and Curly are fighting in the back seat of the car. No one is in the driver’s seat. As the boys settle down, Curly looks up and says, “Hey, don’t look now but we’re about to be killed.”

Leave it to The Three Stooges to provide the perfect metaphor for what passes as a budget debate in Washington these days.

It appears that we’re headed for a government shutdown in April and a possible default in May all because politicians can’t stop squabbling over a few billion dollars from a small slice of the budget while our overall fiscal policy is headed for a cliff.

The long-awaited “adult conversation” has not yet begun.

Very few dispute the fact that we’re on an unsustainable fiscal path. Yet too few seem willing to take the mountain of official and unofficial warnings seriously enough to do anything about them.

Indeed, they seem eager to engage in a reckless game of fiscal chicken, virtually daring the other side to do something responsible. We are left with a fierce debate over non-security appropriations that account for only 12 percent of the budget.

That is why even tentative sprouts of reason are worth nurturing. For...

The Government Accountability Office (GAO) recently updated its report on the federal government’s long-term fiscal outlook. The report underscores the serious problems our country faces if it continues on its current fiscal path.

Here are some of the projected milestones for the years ahead, based on one of the scenarios in the GAO's report (the "alternative simulation"* ):

2023 -- Net interest costs would exceed Medicare

2025 -- Federal debt held by the public would exceed the Gross Domestic Product (GDP)

2025 -- Social Security, Medicare, Medicaid and net interest would consume all government revenues.

2029 -- Net interest costs would exceed Social Security

2037 -- Net interest would exceed both Medicare and Medicaid

2038 -- Debt held by the public would exceed 200 percent of GDP

2039 -- The federal deficit would exceed all government revenues.

2046 -- The deficit would reach 22.6 percent of GDP, more than the entire federal budget in 2008 (22.4 percent of GDP).

2047 -- Federal debt held by the public would equal 300 percent of GDP

Budget-watchers in Washington are quite interested in how Republican Paul Ryan, chairman of the House Budget Committee, will write a budget that will achieve the numerous and sometimes conflicting aims of his conference. The difficulties facing him are the subject of a recent Concord Coalition issue brief, which we just updated to reflect the new numbers from the CBO's Preliminary Analysis of the President's Budget.

Ryan faces the need to show noticeable progress on deficits (within at least five to 10 years) because the new Republican majority feels one of the main reasons they were elected in November was because voters were angry about large deficits. He also faces a group of freshmen Republicans who were elected on platforms that primarily called for cuts in non-defense, discretionary programs, while promising to protect defense spending, cut taxes, and not talk too much about the long-term spending challenge in popular entitlement programs.

Even if the new Economic Report of the President had actually discussed better ways to raise revenue or to make Social Security and Medicare programs more sustainable, it would have judiciously avoided using the controversial words “taxes” or “entitlements.”

But this wasn’t just semantics. The President’s Council of Economic Advisers (CEA) avoided the substance of the “tough choices” on tax and spending policy – you know, all that “fiscal responsibility” and “living within our means” that the President often mentions in the abstract.

And with their main theme for this year’s report being “The Foundations of Growth,” the advisers completely left out an explanation of how large, persistent deficits harm economic growth by reducing national (public plus private) saving.

“At the core of the Nation’s economic growth is our capacity to innovate, educate, and build,” the advisers say early in Chapter 3. The rest of the chapter is devoted to the innovating, educating, and building while just assuming we already...

I’m thrilled to announce that The Concord Coalition is laying the groundwork for the 2011 session of The Peter G. Peterson Foundation Fiscal Internship Program. Piloted last year, this program awards stipend-supported internships focused on fiscal issues at different public policy institutions around Washington, DC. While each intern works on their own project with a scholar at a hosting institution, all students in the program come together once a week over the 10-week session for a seminar with a participating organization. With the generous support of the Peterson Foundation, this program introduces students from around the country to the political and policy realities of the federal budget, and gives them hands-on experience in defining solutions to our nation’s fiscal challenge.

Last summer’s successful first run of the Fiscal Internship Program placed five students with internships where they worked on projects ranging from tax expenditures and pension programs, to the complex relationships between federal, state, and local budgets. While each internship experience was unique, the chance to come together each week helped the group develop a shared understanding of the federal budget, and the landscape of institutions that study it.

A flurry of commentary greeted the unsurprising news last week that Social Security is paying out more than it is taking in. According to the Congressional Budget Office (CBO), the Social Security cash deficit for 2010 was $37 billion and will rise to $45 billion this year. The one-year payroll tax holiday enacted in December would actually leave the 2011 deficit much larger ($130 billion), but general revenues will be credited to Social Security to make up for the loss of payroll tax income.

Looking ahead, CBO now projects that Social Security will run perpetual cash deficits, amounting to $547 billion through 2021. By that year, CBO projects that Social Security outlays will exceed cash income by $118 billion.

Viewed as a percentage of the gross domestic product (GDP), Social Security’s cost will grow from 4.8 percent this year to 5.3 percent in 2021.

Running a cash deficit does not mean that full benefits cannot be paid. When there is a shortfall in cash income, Social Security can draw on its trust fund balance to continue issuing checks. Currently, the trust fund has a balance of $2.7 trillion and is projected to remain “solvent” until 2037. But this method of “financing” only serves to demonstrate why the government’s largest program will become a growing budgetary challenge.

Urban Institute scholar Gene Steuerle has run the numbers and found that for Medicare, retirees are getting a really good deal.

In a fascinating set of calculations, Steuerle and colleague Stephanie Rennane, looked at both Social Security and Medicare and estimated the levels of benefits relative to taxes (and premiums for Medicare) paid for many different levels of income and years of retirement.

For Social Security, prior generations received substantially more benefits than taxes paid, while current retirees and those in the future who earn average and above-average wages are scheduled to receive slightly less cash benefits than taxes paid. The lowest income workers are scheduled to still get more in benefits than taxes paid.

For Medicare, however, their conclusion is that, "Past and current retirees, and most working age adults, will never pay for all of their benefits."

The basic reason is that Medicare payroll taxes, which only go towards Medicare Part A (hospital insurance), combined with premiums (which are set at levels to pay for about 25 percent of Medicare Part B costs), only cover 51 to 58 percent of total Medicare ...